Paying For It

The consequence of fiscal austerity and unwillingness to raise taxes on the rich is that America doesn't have the means to lift the bottom half. So what are leading Democrats prescribing? More of the same.

Over a decade ago when, as secretary of labor, I hollered about America's widening inequality, I'd get phone calls from Democratic officials who politely asked me to shut up. After all, I was part of the administration, and my complaints made it seem as if the administration wasn't doing nearly enough.

It wasn't. An expanded Earned Income Tax Credit helped the poorest, but the old working class was going nowhere. At Alan Greenspan's insistence, Bill Clinton jettisoned most of his agenda in order to cut the budget deficit. In return, Greenspan lowered interest rates and created a booming economy that helped Clinton get re-elected. The boom also created enough demand to lift blue-collar wages and temporarily halt widening inequality.

But the underlying trend hasn't changed. Recent data from the IRS show that the wealthiest 1 percent of Americans are earning more than 21 percent of all income -- a post–World War II record. The bottom 50 percent of all Americans combined are earning just 12.8 percent. The consequence of fiscal austerity and unwillingness to raise taxes on the rich is that America doesn't have the means to lift the bottom half. So what are leading Democrats prescribing? More of the same.

There are only two economic philosophies in America -- trickle-down and bottom-up. Trickle-down means the rich get richer and pay less in taxes. Supposedly they use their extra income to invest in America, which makes all of us more productive. But in a global economy, investments don't trickle down; they trickle out to wherever on the planet the rich can get the highest return. If trickle-down worked as advertised, inequality wouldn't be widening so fast.

Bottom-up means giving all Americans what they need to be productive -- universal and affordable health coverage, good schools, a chance to attend college, job retraining, and affordable child care, for starters. So the question is how the nation can afford all this -- and also give the soon-to-retire baby boomers the Social Security and Medicare they expect, pay for homeland security and national defense, invest in non-fossil fuel–based technologies, and repair the nation's decrepit infrastructure. I haven't even mentioned the trillion dollars necessary to shield the middle class from the Alternative Minimum Tax. Even if we cut corporate welfare, eliminated subsidies to agribusiness, and banned all earmarks, we wouldn't have nearly enough.

The only way to meet these needs is to stop obsessing about balancing the budget and start pushing for a serious tax hike on the rich. Yet all Democratic presidential candidates are styling themselves "fiscal conservatives" and none have suggested raising the marginal tax rate on the richest above the 38 percent rate it was at under Bill Clinton (it's now 35 percent, and the richest of the rich -- the hedge-fund managers, private-equity managers, and venture capitalists -- are paying only 15 percent, since their earnings are treated as capital gains). The Democrats may talk bottom-up economics, but they're still wedded to trickle-down.

Who should pay what? In paying taxes, people ought to feel about the same degree of pain. Those earning $2 million a year ought to pay a larger portion of their incomes in taxes than those earning $20,000 a year. Even Adam Smith saw the wisdom of a graduated tax. "The rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion," he wrote.

The standard right-wing argument is that a big portion of taxes are already paid by America's rich. That's not only wrong (it leaves out the highly regressive taxes on payrolls, sales, and "sin") but irrelevant. The rich have become so wealthy that even if each paid out a minuscule percent of their incomes in taxes, they'd still -- as a group -- account for a significant share of the total. The ethical and logical issue has nothing to do with the sacrifice an economic "class" makes but the sacrifice an individual makes. I find it ironic that right wingers who extol the virtues of individualism and abhor so-called "class warfare" resort to such specious arguments.

So what's fair? I'd say a 50 percent marginal tax rate on the very rich (earning over $500,000 a year). Plus an annual wealth tax of one-tenth of 1 percent on the net worth of people holding more than $5 million in total assets. Can't be done, you say? Well, the highest marginal tax rate under Republican Dwight Eisenhower was 91 percent, and the American economy did fine. You say the rich will leave the country rather than face a marginal tax of 50 percent? Let them, and take away their citizenship. That should be the Democratic version of tough love.